What is the purpose of the prospective payment system (IPPS)?

• A. To reimburse hospitals based on length of stay.
• B. To provide a flat payment amount to hospitals for each DRG.
• C. To fund patient care through per-service charges.
• D. To cap yearly hospital revenue.

Answer: (B)

The key idea is that inpatient payments are set in advance as a fixed amount for each hospitalization, determined by the diagnosis-related group (DRG) category. This is the prospective payment approach: the hospital knows the payment before care is provided, and the amount isn’t tied to the actual costs of the stay or its length.

DRGs group similar inpatient cases so the fixed rate reflects typical resource use for that category. Adjustments may apply for factors like geographic location, teaching status, or case mix, but the base concept remains a per-admission, pre-determined payment rather than billing per service or per day.

This design incentivizes efficiency: hospitals earn more when they keep costs under the fixed rate and are motivated to avoid unnecessary services or days. It’s not about paying based on length of stay, nor about charging per service, nor about setting a hard cap on total revenue.